Futureswap is a protocol that can be considered a hybrid between a perpetual platform and Uniswap without the high slippage. It uses automated market making for perpetuals.
Futureswap aims to provide the best price execution environment for large perpetual trades. Through Futureswap's series of signatures and meta-transactions traders can place trades on Ethereum layer 1 with near instantaneous execution on Futureswaps layer 1.5.
There are three actors in the system:
1. Liquidity Providers [LP]: LPs add liquidity to the platform in equal value amounts per exchange. For example, if they wanted to add value to an ETH/USDC pool they would add $100 of ETH and $100 of USDC. They are minted liquidity tokens similarly to Uniswap. LPs can redeem liquidity at any time if their liquidity is not in a trade. They will ideally be receiving the trade fees for allowing traders to use their liquidity. They will also be earning FST [Futureswap Token], the native governance token, as an added incentive.
2. Traders: Traders can open long or short positions with a leverage up to 10x.
3. Liquidators: Liquidators monitor the platform for positions that are close to violating margin requirements. They receive an adjustable fee for sending this transaction in. They do not need to include any value with this transaction as they do not have to take over the trade. The trade is just closed.
⏳ Futureswap is a decentralized platform that enables traders to enter into leveraged perpetual contracts at low rates backed by our liquidity pools using automated market making. Futureswap can be viewed as a hybrid between Uniswap and a leveraged trading platform that allows up to 10x leverage.
Our goal is to disrupt the multi-billion dollar leveraged trading market dominated by a centralized services. Our decentralized approach allows us to compete with lower fees, more token pairs, and significant returns for liquidity providers.
Automated Market Making: Instead of relying on order books, Futureswap uses automated market making by leveraging the assets of liquidity providers, similarly to Uniswap.
Best Price Execution: Once Futureswap hits a critical mass of liquidity (estimated to be around 50m USD) the slippage/price execution on Futureswap should be better than what is offered on current decentralized exchanges.
Incentives: Liquidity providers earn FST and fees from the trading commissions that are generated by traders’ activity.
Position Balancing: To minimize liquidity provider risk, Futureswap maintains symmetry between longs and shorts by using scaled fees that redistribute capital from the in-demand side to incentivize the less in demand side as well as by causing the open/exit price for new trades to the more popular side, to be less favorable. For more info, see the Dynamic Funding Rate section.
For Liquidity Providers
Similar to Uniswap, Futureswap is powered by liquidity providers. Every Futureswap liquidity pool holds two ERC-20 tokens one as a stable token (DAI, USDC, ect..) and another as an asset token (ETH). Liquidity providers are not buying a token like on a traditional exchange; instead, they are contributing to the specific pair’s pool. The assets deposited are added to the larger pool for that pair. An internal token that represents relative ownership to the liquidity pool’s assets is issued to liquidity providers.
Automated market making means that Futureswap’s liquidity providers may initially take the other side of an unmatched perpetual position. This risk of loss is detrimental to Futureswap’s liquidity pools being seen as a safe haven for earning low-risk interest. To mitigate drastic imbalances between position volumes, an increasing fee is charged to the more popular side along with a less favorable entry price. As the disparity between shorts and longs grows the over-represented side is disincentivized by paying an increasing fee to the less popular side. We call this the Dynamic Funding Rate.
Dynamic Funding Rate
Keeping the balance between longs and shorts is important for our system to achieve maximum returns for liquidity providers. In the case of a trade imbalance, liquidity providers are exposed to the over-represented side.
The funding rate changes dynamically based on the balance between the ratio of open shorts and longs. A volume-balanced long and short pool would have a near 0% funding fee while a pool with significantly more long exposure would have a much higher funding fee for the longs and an incentive fee for the underrepresented shorts. The funding fee scales exponentially.
To achieve a dynamic fee, traders do not own a set amount of collateral but rather a relative share of the collateral pool for their trade type. When a trade is initiated the appropriate collateral is transitioned from one collateral pool to the other. This facilitates a dynamic funding fee between all longs and shorts at once.
Example: If the long pool and short pools were both 50% allocated to open trades, the funding fee would roughly 0.03% for both sides. A large trader opens the remaining 50% of the long pool so that the long pool is now 100% allocated while the shorts are still 50%.
Since the large trade of 50% of the long pool occurred at once, the fee as expected will be significantly greater than 0.03% and could be in the low 0.1 – 0.3% range. Now that the funding fee is likely 1–10x that of other platforms, arbitrageurs will capitalize on the opportunity. They will open shorts on Futureswap to earn the 0.1 – 0.3% funding fee while simultaneously entering longs on other platforms to hedge their exposure. This incentive will return the longs and shorts back to near equilibrium.
The way this fee scales is adjustable. We anticipate that our initial estimation for the funding fee’s scaling ratio to be incorrect, and as such, it can be adjusted via governance mechanisms.
Due to EVM limitations, running consistent logic checks for margin collateralization infractions is not possible. Futureswap, similar to Maker’s CDP liquidation mechanics, allows anyone to send a liquidation transaction to the contract. The contract then checks if the specific trade is in violation of margin collateralization rules and, if so, closes the trade. A 30% liquidation fee is charged to the remaining collateral and paid to the liquidator. 65% is returned to the trade initiator and the remaining 5% is returned to the liquidity pool as an additional fee for bearing the risk of the trade.
For the security of liquidity providers, trades have a set liquidation price saved at trade initiation (updateable via margin addition). This price is what is used for liquidation. This means that if in the case of a black swan event, where the underlying asset is extremely volatile and liquidation transactions cannot or are not feasible to be sent, the trade will still be liquidated at the stored liquidation price upon an eventual liquidation transaction receipt.